The West Still Beckons Retailers (3/18)

Each month, Site Optimizer will discuss industry trends—most importantly, leasing issues—with experts in the retail real estate industry. This month, we spoke with Jack Kyser, founding economist of the Kyser Center for Economic Research at the Los Angeles County Economic Development Corp. (LAEDC). For years, the call to go westward was strong. California, with its vibrant technology-based economy, its tourism dollars and its penchant for growth, seemed an ideal place to open up shop.

Now, though, the state is considered one of the hardest hit by the recession due to the bursting of the housing bubble, a decline in tourism dollars and rising unemployment. California is now mentioned regularly in retail sales reports as an area of decline. The LAEDC, a group that aims to attract and retain businesses in the area, has predicted a modest recovery in the state by the end of the year--good news for retailers with a large percentage of stores in the state.

Site Optimizer: What’s the state of the commercial property market right now for Southern California?

Kyser: It’s what you’d call dead in the water. There is no money available to finance new projects despite how appealing they might be.

SO: Are vacancies increasing or decreasing at this point? What about rents?

Kyser: It depends on where you are in the area. Office vacancy rates are going up all around southern California. Industrial vacancy rates are holding up. Rents have been going down. Both industrial and office rental rates have softened. In retail, it’s difficult to get a good retail vacancy rate for southern California but the bits and pieces of information we have seen indicate the retail vacancy situation is getting worse by the day.

SO: What’s the situation like on the ground?

Kyser: You have empty buildings. If you drive down streets with street front retail, you see a wall of for-lease signs. Some of them are getting sort of old and tattered.

SO: Which industries are suffering the most right now in southern California?

Kyser: Obviously, construction has taken a huge blow. This is due to both residential and non-residential slowdowns. Manufacturing has been hurt because we make a lot of things that go into the construction process or are housing-related. And then you have retail, which has seen a very, very sharp fall off in employment. For consumers, what they were seeing is an ongoing array of great deals. Constant sales. So that is good news for the consumer. For retailers, a lot of them are just hanging on. If you get into the auto industry, auto industry dealers or auto dealers are closing down rather rapidly. It’s almost rather frightening. You have a lot of these sites sitting vacant even after a couple of years. About the only good news out there is aerospace. That is holding steady.

SO: Are there areas of the state or of the city where the market is still strong? What makes those areas different from the ones where retailers are hurting?

Kyser: You had the inland areas of the state. They all got caught up in the housing boom and the bust. The coastal areas seem to be a little bit more resilient—San Francisco and San Jose—because of tourism and high tech. But even that is weakening on them.

SO: How much leverage do tenants have with landlords now given the downturn in the economy? Have they been able to get lower rents or more favorable lease terms?

Kyser: Very definitely. They have huge leverage right now. There are stories right now that major retailers are going to mall owners and asking for reductions in rent or no increases. They have a tremendous amount of leverage. When Mervyns shut down, you had Kohl’s and Forever 21 come in and snap up a lot of those stores. For Forever 21, this was a major ramp up in activity.

SO: What’s your outlook for when things could start turning around in California and in L.A. in particular?

Kyser: We think by the end of the year you’re going to start to see a modest recovery. Obviously, the federal stimulus package will have some positive impact. There are some interesting signs in the housing industry. Some people are now saying that sector could stabilize overall by the end of the year. For the inland counties, it could take [longer]. You had inexpensive land, people coming in with the funny money loans and the developers put the peddle to the metal.

SO: What advice do you have for retailers opening stores soon in the L.A. market? What kind of expectations should they have?

Kyser: I would tell them, first of all, to do your homework, look very, very carefully about what market you want to serve and what would be a good location. Be realistic in what you are going to do because it is a very, very competitive market. Come in longer term. There are still good prospects. Right now it’s a difficult time but in times like these you can score some good locations. If you have a larger operation, there would be smaller malls that would welcome you with open arms. And have interesting merchandise that isn’t priced over the moon.